A.M. Best has downgraded the issuer credit rating (ICR) to “bbb” from “bbb+” and affirmed the financial strength rating (FSR) of ‘B++’ (Good) for the subsidiaries of Michigan-based Meadowbrook Insurance Group, Inc. (MIGI), which operate under an intercompany reinsurance pooling agreement.

Best has also downgraded the ICR to “bb” from “bb+” for MIGI. The outlook for the FSR has been revised to negative from stable, while the outlook for the ICRs remains negative.

Best explained that its “rating actions take into consideration MIGI’s fourth quarter and full year 2013 earnings announcement, which resulted in a net operating loss of $11.9 million for the quarter and a net loss of $112.3 million recorded for the full year. While a significant portion of this full year operating loss stems from a non-cash goodwill impairment charge of $101.6 million recorded during the second quarter, these rating actions consider the additional $31.4 million of adverse reserve development reported in the quarter which, again, was outside of management’s expectations.”

The report also indicated that while “leverage and risk-adjusted capitalization remain adequate for the current rating levels and is not a significant rating concern at this time,” Best said it would “continue to monitor MIGI’s capitalization to ensure that it remains within an acceptable range for its current rating level.

“For the full year 2013, MIGI reported adverse reserve development of $68.4 million, of which $41.6 million was attributable to legacy business that was previously terminated and placed into run-off (including the impact of the arbitration award in the second quarter). In addition, MIGI reported an additional $26.8 million of adverse development in its excess and surplus lines unit on business recently written in accident years 2010, 2011, and 2012.”

Best explained that the negative outlook continues to reflect its “ongoing concerns regarding MIGI’s overall reserve adequacy and the potential for future adverse development, especially given the ongoing development on legacy business and the recent development on some of MIGI’s more recent books of business. While the charges recorded during the fourth quarter were not significant given the overall level of reserves, it is another quarter of negative news. “In addition, the recent adverse development on MIGI’s excess and surplus lines business further erodes confidence that management has successfully walled off adverse reserve development on a going-forward basis.”

In conclusion Best said: “Positive rating actions for MIGI are unlikely in the near to medium term. Key factors that could result in further negative rating actions include any additional adverse development in its reserves, prolonged unprofitable underwriting and operating results, a significant or sustained decline in its risk-adjusted capitalization and/or deterioration in its financial strength.”

The FSR of B++ (Good) has been affirmed and the ICRs downgraded from “bbb+” to “bbb” for the following subsidiaries of Meadowbrook Insurance Group, Inc.: